26 March, 2018
1. Background
In April 15, 1992, H. DAYA INTERNATIONAL CO., LTD. (hereinafter referred to as “DAYA”) filed an application for trademark “MANGO” No. 634764 on goods “clothing; underwear and hats” in class 25 (hereinafter referred to as “the captioned mark”), which was approved for registration in March 20, 1993 and later renewed the validity period to March 19, 2013. In April 8, 2003, CONSOLIDATED ARTISTS B. V. (hereinafter referred to as “ARTISTS”) filed a non-use cancellation application against the captioned mark, and rendered a favorable decision from the China Trademark Office (CTMO). DAYA was not satisfied with the decision and filed an appeal on non-use cancellation claiming that, in the specified period of time, its licensee (SONNETI INTERNATIONAL S. A.) and sub-licensee (Shaoxing Kailiya International Supplies Co., Ltd.) had been manufacturing in mainland China products labelling with the captioned mark and exporting the same to Panama. DAYA also submitted the licensing agreement which granted SONNETI INTERNATIONAL S. A. the permission to use the captioned mark, and other related agreements between it and Shaoxing Kailiya International Supplies Co., Ltd. The Trademark Review and Adjudication Board (the Appeal Board) sustained registration of the captioned mark on part of the designated goods. Dissatisfied with the decision, ARTISTS filed a lawsuit to the Beijing First Intermediate People's Court and successfully cancelled the official decision made by the Appeal Board. This first instance judgement was further upheld by the Beijing High People’s Court. The Appeal Board then cancelled the captioned mark in a retrial. In the meantime, the registrant of the captioned mark was changed to SONNETI INTERNATIONAL S. A., which filed a lawsuit against the Appeal Board and ARTISTS. The Beijing First Intermediate People's Court rejected the claim, and the Beijing High People’s court further affirmed the first instance judgement1.
2. Key Points
If a trademark registrant operates business by OEM mode, namely manufacturing products labelled with the registered mark and exporting the same outside of the Chinese legal region, such a business operation mode does not constitute trademark use in the sense of Trademark Law. According to provisions of Trademark Law on whether a registered trademark has not been used for 3 consecutive years, a registered trademark shall be cancelled if it is only used in OEM activities.
3. Legal Grounds
The Beijing High People’s Court ruled that: although trading activities of labelling products with a licensed registered mark exist between the licensor and licensee of the registered mark, or between the consignor and consignee manufacturing products and labelling them with the licensed registered mark, such trading activities happen between specific market entities without regard to the identification characteristics of the registered mark, which means it is difficult to affirm that the licensed mark plays a part in identifying the source of goods in the trading activities. Thus, such a use behavior of the registered trademark cannot be recognized as trademark use in the sense of Trademark Law, especially when the captioned mark was for export purposes only, and failed to be put into actual use in mainland China. Its function of identifying the source of goods did not give a real play, so its registration could not be maintained only based on OEM businesses or export activities. In the administrative judgment numbered (2012) 2 and the civil judgment numbered (2014) 38 issued by the Supreme People’s Court, both ruled that the OEM business mode shall not be recognized as trademark use by Trademark Law. Though provisions adopted in these two judgments were not Article 44.4 of Trademark Law 2001 as adopted in the subject case, it is so required in the understanding and application of law to give same legal explanation in respect to the same legal concept, except that the law itself makes a distinction. Therefore, when applying Article 44.4 of Trademark Law 2001, the act of attaching a trademark to products only for export purposes shall not be recognized as trademark use in the sense of Trademark Law, and such an act alone is not valid to sustain the registration of the mark.
4. Comments
There are two legal issues involved regarding trademarks and OEM business. The first issue is whether trademark use in OEM products shall be considered as infringing upon other’s exclusive right to use a registered trademark. For instance, a foreign company, which does not own trademark registrations in China, entrusts a Chinese factory with manufacturing or processing products and in the meantime labelling trademarks to the same, which are finally exported to other countries or regions with trademark registrations. The question is whether or not these exported products, labelled with marks, infringe upon the exclusive trademark right of a prior registrant in China. The second issue is whether trademark use in OEM business is sufficient to maintain trademark registration. For instance, a foreign company owns trademark registrations in China. It attaches the registered mark on products manufactured in China and export all abroad. Where a third party files an application of non-use cancellation against the mark, does using trademarks on OEM products constitute trademark use by law, and is this use alone sufficient to sustain trademark registration in China?
With respect to the first issue, the second instance judgment numbered (2014) 38 issued by the Supreme People’s Court ruled that if OEM products are not sold in Chinese markets and all are exported abroad, the trademarks labelled on these products are not used to identify the source of goods, so no confusion and misrecognition could be caused in this regard. Such an act of using trademarks on OEM products does not constitute trademark use by law, which is one of the main elements in recognizing trademark infringement. Therefore, using marks in exported OEM products does not constitute trademark infringement upon the exclusive trademark right of a prior registrant in China.
For the second issue, the Beijing High People’s Court recognized, in judgement No. (2010) 265, the act of processing materials supplied by foreign companies, similar to OEM business, as trademark use as stipulated in Article 44.4 of Trademark Law 2001 (Article 59.2 of Trademark Law 2013; the same below). It ruled that processing materials supplied by foreign companies is a kind of trading act. Although the finished products are not put into actual circulation in Chinese markets, “it would be unfair and against the policy of broadening foreign trade” if not recognizing the act as trademark use and cancelling such marks.
The subject case involves the second issue above. Where a trademark registrant attaches its marks in OEM products and exports all of them outside of Chinese legal regions, can such an act of using trademark be recognized as trademark use in the sense of Trademark Law? Further, can this act keep the mark from staying unused for three consecutive years, and thus maintain its registration validity? The aforesaid judgement No. (2010) 265 issued by Beijing High People’s Court played a guiding role in later cases. For a long period after, it was widely accepted that, in cases of trademark infringement, the act of using trademarks in OEM products does not constitute trademark use by Trademark Law, nor infringe upon the exclusive trademark right of a prior trademark registrant. However, in cases of non-use cancellation, where the consignor of OEM business owns trademark registrations in China, using trademarks in OEM products is exceptionally recognized as trademark use as stipulated in Article 44.4 of Trademark Law, and thus protects the registered mark from cancellation.
The subject case broke the above tradition. It followed out all articles of Trademark Law in recognizing whether using marks in OEM products constitutes trademark use by law. It should be noted that, at the same time, the Beijing High People’s Court made another judgement No. (2017) 53902 upholding the idea in the judgement No. (2010) 265. That is to say, different Chinese courts have formed different practices in deciding whether using marks in OEM products constitutes trademark use as stipulated in Article 44.4 of Trademark Law. Unfortunately, there is still no authoritative Supreme People’s Court’s judicial interpretation on whether trademark use in exported OEM products is sufficient to maintain the trademark registration. How could one unify the recognition conclusion in cases of civil infringement and right affirmation, or determine if there is even such a need for such unification? These questions are still to be answered. Let’s closely follow the judgements of similar cases made by the Supreme People’s Court.
To those foreign companies engaging in OEM businesses in China, namely manufacturing products in China only for exporting purposes, the subject case would bring great impact on their strategies of right affirmation and brand protection in Chinese markets. Currently, filing a Chinese trademark registration is still the safest choice for foreign companies to protect brands in China. They can maintain their trademarks’ validity simply by submitting evidence of the marks’ labelling on OEM products as proof of use. Under such circumstances, foreign businesses can deliberately make distribution plans and marketing strategies in mainland China for their future products. In the meantime, they are able to prevent later registration and use of any similar marks through actions including filing oppositions, invalidations, or infringement proceedings against them, and their own trademark registrations have no risk of being cancelled. If the subject case becomes a typical case or a guiding precedent referenced by the CTMO, Appeal Board, Beijing IP Court or Beijing High People’s Court in the coming cases, foreign companies operating OEM businesses in China would have to re-arrange its strategy to protect rights and brands. They might need to take necessary coping measures against cancellation risks, such as filing back-up applications on major products before the validity period reaches three years.
1. The Second Instance Judgement Numbered (2016) 5003 on Lawsuit on Non-use cancellation Appeal Filed by SONNETI INTERNATIONAL S. A. against the Trademark Review and Adjudication Board & CONSOLIDATED ARTISTS B. V. in Respect of Trademark “MANGO” No. 634764.
2. The Second Instance Judgement Numbered (2017) 5390 on Lawsuit Filed by Xinhai Trading Consultancy Co., Ltd. against the Trademark Review and Adjudication Board & KENT JAPAN KABUSHIKI KAISHA.
